Indonesia and the US miner have made progress in behind-the-scenes negotiations to end an impasse over the future of the world’s most profitable mine

After painting themselves into a corner, the Indonesian government and American mining giant Freeport McMoRan Copper & Gold are finally taking tentative steps in quiet negotiations to end the impasse over the future of the world’s most profitable mine.

The emphasis is on quiet. If the government is serious about securing a long-term, win-win solution — and Freeport seems convinced it is — the talks must stay out of the public arena, where economic nationalists dominate the agenda.

Hence Freeport chief executive Richard Adkerson’s recent quiet dinner with Finance Minister Sri Mulyani Indrawati in Washington and now his under-the-radar visit to Jakarta with chief financial officer Kathleen Quirk, who is involved for the first time.

Apart from the immediate objective of negotiating a so-called “financial stabilization agreement” that will keep the provisions of Freeport’s current contract intact until its expiry in 2021, they now also face the prospect of labor unrest.

Employees are threatening to strike unless Freeport reinstates the 10% of its work force that was laid off when a 12-week government ban on concentrate exports forced the company to cut production by more than 60%.

Adkerson and Quirk were meeting this week with Mines and Energy Minister Ignasius Jonan and a multi-ministerial working group. The group was originally formed to tackle the international arbitration case Freeport has threatened to bring against the government for breach of contract.

Now it is focused instead on the company’s request for a 20-year contract extension beyond 2021. Because it includes taxes and divestment, the stabilization agreement would be a critical component of any longer-term settlement.

“The challenge is to find an agreement that is acceptable to the minister and the president and is acceptable to us,” Adkerson told analysts last month. His reference to the president is a solid pointer to where the ultimate decision lies.

Public opinion, fed by what Australian resources analyst Eve Warburton describes as “popular mobilization and electoral politics,” feels it is high time for Indonesians to own and run their extractive sector.

While that may apply to the simple excavation of surface coal seams and the exploitation of maturing oil and gas fields, it becomes a lot more difficult and expensive when it comes to sophisticated underground mining and deep-water drilling in remote areas of the archipelago.

When the commodity boom ended in 2012, resource nationalism did not fade in Indonesia as it usually has during previous down cycles. Indeed, it even accelerated with new President Joko Widodo building on nationalistic policies introduced by his predecessor Susilo Bambang Yudhoyono.

That has left the Freeport contract negotiations in politicized limbo. While the firm has agreed to build a second US$2.7 billion smelter, demands for a 51% divestment and the replacement of the firm’s contract with a special mining license remain the main sticking points.

“It is important for the government to come out with one voice,” says one source familiar with the discussions. “There is now more clarity. They are now distinguishing between the short and long-term issues.”

If they fail to reach an agreement by mid-October, when a temporary six-month export permit expires, Freeport says it will be forced to suspend the conversion of the Grasberg mine from an open pit to an underground operation.

The company has already cut expenditure on the expansion from US$120 million to US$40 million a month. But shutting down the tunneling work would further delay the six-year period it will already take to ramp up production to near current levels.

More immediately, it will mean laying off 5,000 workers engaged in the first US$6.2 billion underground phase, which began in 2004 and by this year had brought Freeport’s total capital expenditure in the mine since 1973 to US$13.8 billion.

Among them are Australian-based Redpath Mining’s 1,500 specialists, drawn from around the world, who are building much of the common underground infrastructure. Reassembling them once they have been dispersed would take months.

Another US$13.6 billion is planned to be spent between now and 2041 on a project that will eventually see hundreds of kilometers of high-speed electric railway tapping into five different ore bodies deep beneath the Grasberg mine.

The change-over was originally planned to take place this year, but has now been pushed out to 2018, the year before Indonesia’s next presidential elections which could have an inhibiting influence on the current talks.

Because of the risk of subsidence, Freeport must first extract the estimated US$5 billion worth of ore left in the bottom of the two kilometre wide open pit before it can begin block-caving directly beneath it.

Widodo has personally insisted on the 51% divestment of subsidiary PT Freeport Indonesia and any retreat from that would be seized on by opposition leader Prabowo Subianto, who is now widely expected to run against him a second time.

The government is turning Sumatra-based PT Indonesia Asahan Aluminium (Inalam) into a holding company for state-owned mining companies, four years after taking over Southeast Asia’s only aluminum smelter from Japanese interests.

Valuation will play a big part in the Freeport talks, with foreign stock analysts bemused by Indonesia’s position that the US miner can’t claim Grasberg’s reserves because they constitutionally belong to the country’s citizens.

How that will be resolved is unclear. If there is any wiggle room, as far as Freeport is concerned, it will almost certainly have to involve an initial public offering (IPO) that will conceivably allow it to retain a controlling interest to protect its investment.

Some lawyers have suggested that could be accomplished by the parent company issuing class A and class B shares, with the B shares carrying limited or no voting rights.

Outside of an IPO, there is still the question of where local entities, either the central and regional governments, state enterprises or domestic corporations, will get the money to buy such a significant stake.

The government already has a 9.36% interest in Freeport Indonesia, but the company’s offer of a further 10.64% stake has stalled because its declared valuation is two-thirds that of the firm’s US$1.7 billion.

Freeport had originally agreed to a 30% divestment under a 2014 memorandum of understanding reached with the Yudhoyono administration. All that changed, however, when Widodo came to power.

For now, neither side is winning from the legal standoff, labor layoffs and reduced production. The ban on concentrate exports, which began in mid-January and lasted until the issuance of a temporary license on April 21, cost the government US$500 million in lost revenues and taxes.

In February, Freeport responded by triggering a 120-day arbitration notice, which is likely to be extended beyond mid-June provided the two sides are talking and there remains hope of a settlement in a year that marks Freeport’s 50-year anniversary in Indonesia.